Method of measuring GDP messed up: Former GOI Chief Economic Advisor

The deflationary pressures arising due to Chinese investments have disrupted the manner in which GDP is measured, said Arvind Virmani while addressing the National Competitiveness Forum in New Delhi

e4m by Saif Ahmad Khan
Updated: Oct 3, 2016 8:06 AM
Method of measuring GDP messed up: Former GOI Chief Economic Advisor

Speaking at the National Competitiveness Forum in New Delhi, Arvind Virmani, Former Chief Economic Advisor to the Government of India, stated that the method of measuring the Gross Domestic Product (GDP) has got messed up. According to the Harvard-educated economist, this has happened due to the deflationary pressures coming out of China that was being exerted on the global economies including India.

“At the time when the UN system of GDP was constructed, nobody anticipated this kind of a situation where you would have major deflation across the world. That means many of the correlations that people were used to don’t apply,” he said.

He added that “in this period of deflation, everything in some sense of the word gets messed up” and the “way you measure GDP gets messed up” too. Pointing out that China was not a market-based economy, he mentioned that the China growth model was premised on huge investments. Interestingly, these investments are made regardless of the returns or demand-supply situation thereby generating deflationary pressures on the world economy.

Addressing the situation arising out of the global financial crisis, Virmani claimed that it was the first time in his professional career of three decades that he found the “crisis was in the developed countries” i.e. USA and other European nations. Initially, the magnitude of the crisis was not understood but later on it was realized that this was biggest financial uncertainty since Great Depression, he said.

Elaborating on the implications of the same, he mentioned that the old world characterised in terms of rising trade and globalization was over. “The bubble has burst and one of the most important implications of it was that economies who were dependent on export-led growth would suffer. Those who were either neutral or domestically oriented would do better,” he said. The situation has led to the emergence of duality in globalized economies.

“There are these globalized sectors of the economy and there are the domestically oriented or neutral sectors,” he argued.  He also observed that the US economy was more closed than India in many ways. “The funny thing is the ratio of United States’ imports to GDP is now significantly lower than in India. People don’t realise. They are also quite domestically oriented and that is why they are doing relatively better than the much more globalized economies of Europe,” he said. 

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